The financial markets have turned upside down in the past one and a half years due to the global pandemic and government lockdowns. It’s interesting to see that people arrive at vastly different conclusions from the same financial event. While some people have made a fortune beyond their wildest dreams, others have incurred huge losses when they are on the wrong side of the market.
I congratulate you if you made some right decisions and turned crises into opportunities. But I want to spend more time encouraging those who didn’t do well.
In the course of my financial advisory work over more than a decade, I have talked to many investors and ex-investors (who give up investing) about their investment successes as well as their failures. An interesting thing I have found is that how poorly people are prepared to accept losses. Few people can accept that losing money is part and parcel of investing.
- They hold a losing position for years in the name of long term investing; or
- They sold stocks too early, worrying that they can’t “lock-in” the profit.
It is hard to handle losses because emotionally, accepting losses means accepting you are wrong. And from what I see, humans, especially men, aren’t a species that can easily admit our own mistakes (think about how hard to say “sorry” to your partner after a quarrel).
So today I want to dive into this topic deeper to discuss how you should look at investment losses the right way so you can set the right direction for your future investment journey.
Equate chance to investment success and failure.
People often equate their investment success or failure with the strategies they use or the products they buy.
Investors like to argue about whether they should do value investing, trend investing or index investing, or whether they should invest in a unit trust, ETF, stocks or REITs, etc.
One thing that is commonly overlooked is the element of “chance” in their decisions.
For example, if you believe in passive investing you might only buy the S&P 500 ETF (say, SPY). You can use the same strategy and same product but have vastly different outcomes. For example:
- If you bought SPY in Feb 2020, you would have made 35% by now (August 2021).
- But if you bought SPY in March 2020, you would have made 103%!
You can use the same strategy, with the same instrument, but have a completely different journey. There was a 70% difference over 1.5 years if you started just one month apart with your investment.
Related Reading: 3 myths of ETF investing.
And what if you bought the STI ETF?
- You bought STI in Feb 2020 and you are still losing 6% by now!
- You bought STI in March 2020 and you only made 37%.
So when someone tells you that they made some fantastic returns, you need to be wary if it was due to luck or skill. It could be a one-off event that he can never duplicate again. And if you were not doing so well in the past year, you don’t need to blame yourself too much and wrongly conclude that you “simply can’t do it”.
Related reading: 3 things you don’t know about investment performance.
You can’t control most of the things in life
In the society that we grow up in, we are told that failure is a performance-based outcome or a shortcoming of our own doing. For example, the school system does not tolerate mistakes as there is only one right answer in the exam.
But in real life, we often overlook the fact that chance-based outcomes are not up to us.
Imagine you walk up to a stranger and ask him for directions. The man brushes you off and ignores your question. Then you turn to another person, the person doesn’t even stop. The third person you approach just shakes her head and refuses to talk to you. Would you conclude “Strangers are just not friendly” or “There is something wrong with me”?
Gosh, there are 7.6 billion people on earth. How can you arrive at either conclusion based on just these three brush-offs?
Instead, try looking at the example this way. Talking to a stranger is chance-based. They might be busy or disinterested. The result is a chance outcome.
Applying for a job? Chance.
Asking a girl for a date? Chance.
There are actions that you can take but the outcome is often out of our control.
You may buy a stock and the price triples. Chance.
The next stock you buy lost half of its value. Chance.
The biggest mistakes amateur investors make is that they equate the success and failure of each of their investment outcomes to either their skills or the methodologies they use. They think if the investment didn’t work out well, there must be something wrong with the stock. But if it does work out well, then it’s because of their skill. They’ve fallen for the logical fallacy: a false dilemma.
You often hear people saying “nobody can predict the market”. It doesn’t mean the market is not predictable, it actually means the market cannot be predicted with 100% accuracy because everything is a chance. That is why among investment professionals, we talk about statistical data such as standard deviations, t-score, value-at-risks. We need to know our chance.
You can only increase your chance to be correct if you have more knowledge and experience, but you can never be sure. Just like even the world-class tennis player can also occasionally miss the ball.
How can you distinguish between chance and failure?
Having said all of the above, it doesn’t mean that if you fail in investing, it is always due to chance.
The definition of insanity is doing the same thing over and over again, but expecting different results. – Albert Einstein
The difference between chance and failure is that failure has a fully predictable result. For example, If you touch a hot stove, your hand will get burned. If you touch the same hot stove 10 times, you will continue to get burned. Nothing has changed.
How does this apply to personal finance?
- If you want to save one million dollars for your retirement and you deposit $200 per month into a “savings” account, you will never get there.
- If you keep on buying speculative non-profitable companies based on forum rumours, you will likely burn your entire capital sooner or later.
Persistence is chance’s best friend. If you keep trying a chance-based venture, you will probably succeed in time. Since I lost money in my first casino adventure, I switched to playing blackjack after I read “The Market Wizards” and learned how Ed Thorp transformed himself from a skeptical academic to a blackjack card counter and finally to a successful speculator.
Investing is a predictable game even if you can’t control each outcome. – Ivan Guan
Chance and failure can overlap
The key here is to distinguish whether your investment success or failure is due to chance or skill. In many cases, it is hard to know unless you are well trained.
You can make money by doing the wrong thing and yet lose money even if you make the right call. Let me give you some examples from my personal experiences.
There was one time that I used a new platform and placed a wrong order to buy Samsung Electronics stock and I completely forgot about it. I didn’t even know the order was filled until some months later. Guess what? Samsung was doing well at that time and I made a small fortune!
Here is another example, after the market crash last year, I was convinced that commodity prices would go up. Particularly, I was bullish on Palm Oil prices. You know what? I was damn right! From the chart below, you can see that Palm oil prices have skyrocketed since last year.
But I never made serious money. Somehow the price of the palm oil producer stock just didn’t take off.
When I look back, I was also convinced of the potential upside of China’s technology companies when I talked about Hang Seng tech last year. Chinese technology stocks were doing well all the way to mid-Feb until the regulatory crackdown dampened the whole market.
Did I feel disappointed with the outcome? Of course.
Did I think it is an investment failure? Hell no.
It is just a black swan event and we just need to move on. I think I would have made the same decision even if I can go back in time.
Additional Reading: Should you buy China tech stocks after China’s tech crackdown?
When your investment choices succeed or fail, you need to decide whether it was because of chance or a failed investment strategy. The most difficult step is to have the courage to acknowledge your own mistake and move on.
Men who have participated in a decision develop a stake in that decision. – James Thomson
Additional reading: “What are Hedge Fund Billionaire Ray Dalio’s investment principles about being wrong?”
Let me summarize…
One of the best-selling series is the Harry Potter books. Yet JK Rowling was rejected 12 times before it was published. When it comes to investing, mistakes and even losing money is part and parcel of the journey. In a nutshell,
- Investing is chance-based. No matter what strategy you use, the chance will remain a big factor. Therefore, acknowledge that you can’t control the outcome.
- Be persistent. If you invest in the wrong stock, you may lose a few hundred or a few thousand dollars. Will it ruin your life? Unlikely. But the upside of a successful investment journey is life-changing.
- When an investment fails, try a different approach. Failure by design and failure by chance is different. Failure allows you to eliminate the way of doing the wrong things (remember the hot stove example?). Be persistent but not stubborn. Try to vary strategies and learn to move on from failure.
- Do not take it as a personal failure. Instead of feeling sorry for yourself, focus on what you could do differently next time. Don’t be too discouraged.
Don’t give up investing if you faced hurdles and frustrations. You may be three feet from the gold.